Assessing fraud risk isn’t limited to a single audit, it’s a core part of effective governance across most compliance frameworks. Auditors expect organizations to show that they’ve considered where intentional, deceptive activity could occur and how their controls prevent or detect it. This guide explains why fraud is a critical consideration and how to incorporate it into your risk assessment, whether you’re working toward SOC 2, SOX, ISO 27001, or other standards.
Fraud Risk as a Universal Compliance Requirement
While each framework approaches fraud differently, all require proactive identification and mitigation of intentional deception.
SOC 2
SOC 2 requires organizations to protect the integrity and trust of their systems and data. Controls related to access management, system monitoring, and change management (e.g., CC6.1, CC7.2, CC8) help prevent or detect malicious activity.
Sarbanes-Oxley (SOX)
SOX emphasizes preventing fraudulent financial reporting. Internal controls are designed to ensure the accuracy of financial statements and prevent misconduct that could lead to material misrepresentation.
ISO 27001
ISO 27001 requires maintaining the confidentiality, integrity, and availability of information. Fraud risks such as data tampering, unauthorized access for personal gain, or industrial espionage should be addressed through your ISMS and related controls.
PCI DSS
PCI DSS is designed to prevent credit card fraud by protecting cardholder data during storage, processing, and transmission.
HIPAA
HIPAA compliance includes addressing fraud risks related to protected health information (ePHI), such as medical identity theft and fraudulent billing activities.
Understanding Fraud: The Fraud Triangle
The Fraud Triangle is a simple model that helps explain why fraud occurs. It shows that most fraud arises when three factors come together:
Pressure: The motivation or need that drives someone to commit fraud, such as financial stress, personal debts, or performance targets.
Opportunity: The chance to commit fraud due to weaknesses in controls, such as poor monitoring, excessive access, or lack of oversight.
Rationalization: The mental justification a person uses to convince themselves that committing fraud is acceptable, even if it’s wrong. For example, they might think, “I deserve this,” “I’ll pay it back later,” or “Everyone does it.”
By considering these three factors, you can better identify areas of fraud risk in your organization and strengthen controls to prevent or detect fraudulent activity.
Categories of Fraud Risks
Fraud risks can originate from multiple sources. Include examples from each category when updating your risk assessment.
Internal Fraud
Fraud originating from within the organization, often by employees or contractors.
Examples:
Abuse of administrative privileges to access sensitive data or make unauthorized changes.
Falsified financial transactions or data manipulation.
Collusion to bypass approval processes or internal checks.
Mitigations: Segregation of duties, least-privilege access, monitoring of privileged activity, enforcement of a code of conduct, and internal audits.
External Fraud
Fraud committed by external actors exploiting weaknesses in processes, vendors, or systems.
Examples:
Phishing or Business Email Compromise (BEC) attacks.
Vendor fraud or falsified invoices.
Theft or misuse of confidential or proprietary data.
Mitigations: Vendor due diligence, identity verification, monitoring for anomalies, anti-phishing controls, and contract oversight.
Operational or Process-Level Fraud
Fraud occurring within normal business processes due to weak or unenforced controls.
Examples:
Manipulation of expense reports or performance metrics.
Tampering with change requests or support tickets.
Inaccurate or falsified documentation in business operations.
Mitigations: Approval workflows, management review, independent validation, automated reconciliation, and activity logging.
Integrating Fraud Risks into Your Risk Assessment
You can incorporate fraud risks directly into your existing risk assessment by:
Adding risk entries describing potential internal, external, and operational fraud risks.
Linking existing controls such as access reviews, monitoring, or vendor management.
Scoring each risk using your organization’s likelihood and impact criteria.
Documenting mitigation and residual risk, and noting any planned follow-up actions.
Including a statement confirming fraud risk was evaluated as part of your overall risk management process.
You don’t need to list every possible fraud scenario, focus on those that are relevant and material to your organization. Embedding fraud considerations into your standard risk management process shows auditors that your program proactively addresses this key category of risk.